Part 1 of this series highlighted the issues, regulatory and supply chain complexities and efforts by industry to tighten the control of precious minerals sourcing. Part 2 of the series dove a bit deeper into efforts by key manufacturers in how they are auditing, validating and tracing the conflict minerals supply chain. The post also presented some ideas on and what responsibilities non-governmental organizations have had in shaping the debate over conflict minerals, and the roles or responsibilities that we as consumers should take in this thorny human rights- environmental impacts meets consumer products issue.

The final part of this series highlights specific international guidance and steps that industries and consumers can and are taking to proactively address supply chain minerals sourcing and maintain a high level of corporate social responsibility.

But before I go further, a postscript to Part 2. Following my second post, I was contacted by Suzanne Fallender of Intel with an update on the company’s efforts that I described in the second post. In her response, for which he apologized for the delay, she provided a copy of a white paper prepared and posted in late April. In it, the company states “we continue to work diligently to put the systems and processes in place that will enable us, with a high degree of confidence, to declare that our products are conflict-free. Our efforts on conflict minerals are focused in three main areas: (1) driving accountability and ownership within our own supply chain through smelter reviews and validation audits; (2) partnering with key industry associations, including the Electronic Industry Citizenship Coalition (EICC) and the Global e-Sustainability Initiative (GeSI); and (3) working with both governmental agencies and NGOs to achieve in-region sourcing”.

The Intel white paper concludes by stating “From the time we became aware of the potential for conflict-metals from the DRC to enter our supply chain, we have responded to this issue with a sense of urgency and resolve. We have approached this issue like we would address other significant business challenges at Intel.” I believe Intel and their efforts to date bear that out. They are encouraging comments on their plans and efforts, which can be submitted at http://www.intel.com/about/corporateresponsibility/contactus/index.htm.

The OECD guidance approaches minerals sourcing and supply chain management from a “risk management” and “due diligence” perspective and offers a framework to promote accountability and transparency. A fundamental problem with the OECD guidance is that it’s voluntary. And with any voluntary guidance, there’s reluctance or little pressure to fully commit to implementation, unless key market or financial drivers threaten or pressure companies to do so. Also, what is challenging as mentioned before are the many steps and sometimes fragmented nature of the minerals sourcing supply chain. The myriad of hands that minerals often pass through on the way to the smelter, and in turn on to intermediate and final product manufacturers is numerous and admittedly difficult to accurately trace. Risk levels are particularly high when minerals are derived from the artisanal mining operations (as compared to larger scale operations). Consequently, being able to control and influence risk along the entire minerals sourcing network and assure that adequate due diligence mechanisms are in place to keep track of intermediary activities is daunting to say the least. All the more reason to seek ways to streamline the sourcing process by limiting the number of materials exchanges, stepping up oversight, and disengaging activities with underperforming or high risk suppliers

The OECD suggests a five step framework for risk-based due diligence in the mineral supply chain that strongly advocates for traceability and accounting systems for both upstream and downstream supply chain organizations:

Step 1: Establish strong company management systems

Step 2: Identify and assess risks in the supply chain

Step 3: Design and implement a strategy to respond to identified risks

In some contrast to the OECD guidance, the Enough Project offers its own set of valuable ideas and frameworks for the electronics sector and others working in east Africa to follow. Enough Project, in its recent report entitled Certification: The Path to Conflict-Free Minerals from Congo , states that international certification efforts are vital to long-term solutions to conflict minerals issues and on assuring revenue “transparency”. The Enough Project offers its “five key lessons that should be incorporated into a certification scheme for conflict minerals:

A “conductor” is needed to convene a high-level diplomatic partnership on certification and help transform words into action. A “conductor”—a leader with gravitas and political support—is needed to bring stakeholders to the table and to issue a call to action. President Bill Clinton provided a precedent for this when he called together companies and sweatshop labor campaigners in 1996, resulting in the Fair Labor Association certification process.

Certification should be governed and funded by a multi-stakeholder body that includes companies, governments, and NGOs. The legitimacy of a process rests on a multi-stakeholder governing and funding framework that ensures accountability.

Certification must include independent third-party auditing and monitoring. Regular independent audits assure the public that the process is credible, and on-the-ground monitoring ensures accuracy.

Transparency of audits and data is essential to making certification work. Certification processes are moving rapidly towards full disclosure of data and audits.

Certification must have teeth. Certification can only work if its standards have meaning on the ground and are enforced through penalties for noncompliance.”

The Enough Project report calls on the United States, through Secretary of State Hilary Clinton, to convene a senior partnership on certification with industry and the International Conference on the Great Lakes Region (ICGLR). The report also states that “the United States must act quickly, as minerals traders in Congo are already seeking alternative, opaque markets for their minerals. An internationally accepted certification process would deter this development.” Last week, a letter writing campaign launched encouraging U.S. Secretary of State Clinton to state a public U.S. position on this issue and convene a high-level partnership on certification with leading electronics and end-user companies, together with Congolese President Kabila and regional governments. The goal of this summit would be “aimed at unifying the regional and industry-led initiatives and gaining consensus on a system of independent checks on the ground”.

Meantime, Conflict-Free Smelter the industry protocols proposed and under development by the EICC and GeSi are focused on two key areas targeted at what they characterize as the “pinch point” in the supply chain- the smelter:

Business Process Review: Evaluate company policies and or codes of conduct relating to conflict minerals

Material Analysis Review: 1) Conduct a complete material analysis to demonstrate that all sources of materials procured by the smelting company are conflict-free; 2) Evaluate whether source locations are consistent with known mining locations; and 3) Establish whether material identified as “recycled” meets the definition of recycled materials.

The CFS program is moving forward in spite of the delay by the SEC for final rulemaking. CFS assessments for tantalum began in the fourth quarter, 2010 and are expected to be posted on the EICC website starting this month. Tin, tungsten and gold are planned to commence later this year.

What Makes a Good Auditor?

In addition to “what” types of certification schemes are needed and how they should be administered or governed, there’s the matter of “who” should do the auditing and third- part certifying. What I see as critical here is Step 4 of the OECD process and Step 3 of the Enough Projects documents, both of which the EICC and GeSi programs are attempting to fulfill. However, key to this audit process is the “independence” and competency factor as well as what qualifications auditors have to perform these assessments. The Enough Project gleaned through numerous frameworks in order to develop its proposed certification approach, which deserves careful consideration. In addition, while the SEC has yet to clarify the specifics of the Dodd-Frank provision, ELM Consulting’s Lawrence Heim in a recent AgMetal Miner series, notes:

… There are a number of auditor certifications that could be considered applicable to this scope of audit, but none should be considered to automatically qualify an auditor for these engagements. These audits require a unique blend of expertise in general auditing processes/procedures, environmental knowledge, accounting basics, chemistry/industrial processes, procurement controls, contracts and supply chain fundamentals. Finally, the auditor must be able to execute the engagement in accordance with the auditor/engagement standards of the Government Auditing Standards, such as the standards for Attestation Engagements or the standards for Performance Audits (GAO–07–731G) GAO-07-731G contains standards on auditor independence.

Associations consist of multiple members who have varying degrees of business relationships with each other and the audited entities, putting the auditor in a position of serving “multiple masters” relative to influence over the audit scope, process, information, report and payment. Our research and inquiries to qualified experts in SEC auditing requirements indicates that there appears to be no precedent in any other legally-required audit in the US that has been fulfilled in this manner.

Comparisons and Contrasts

I had the chance last week to listen in on an informative webinar by STR Responsible Sourcing. The company is an accredited monitor for numerous social certification programs, and partners with many organizations that share our mission of assuring responsible sourcing practices. The company compared governmental, regional, industry schemes for addressing minerals mined in conflict regions. The figure below summarizes each of the initiatives and target areas.

According to STR, there are a series of challenges lying ahead for both upstream suppliers (e.g. miners (artisanal and small-scale or large-scale producers), local traders or exporters from the country of mineral origin, international concentrate traders, mineral re-processors and smelters/refiners) and downstream users (e.g. metal traders and exchanges, component manufacturers, product manufacturers, original equipment manufacturers (OEMs) and retailers) of precious minerals. Downstream Supply Chain parties are faced with some unique challenges, namely:

No clearly defined requirements of “due diligence”

No guarantees for “conflict-free”

Limited transparency in upstream supply chain

No traceability in downstream supply chain

No generally accepted standard / certification

For the upstream supply chain, primary challenges include:

Complexity of the supply chain

Difficulty to include small and artisanal mining

Challenges for implementation of traceability schemes in the DRC due to militarization of mines and widespread lack of formalization of small scale mining

Meanwhile, according to STR, the downstream supply chain might consider the following approaches to start on the path of responsible sourcing of precious minerals:

If you are a manufacturer of electronics, jewelry, automotive parts or other goods that may be subject to sourcing through the DRC or other conflict prone areas of the world, consider (at a minimum), the following steps:

Read the OECD and Enough Project guidance documents to understand the issues and risks associated with responsible sourcing

Stay tuned into the progress that your industry associations are achieving to bring a better sense of responsible management to this issue

Follow the development of the SEC conflict mineral guidelines

Work with procurement, operations, legal, environmental and communications staff to craft a procurement policy & selection of supplier selection process (along the lines that Intel, HP, Motorola and others have)

Request origin and chain of custody documentation for purchases to assure traceability

Establish adequate record-keeping system

Ensure that relevant staff is trained on procurement policies, procedures to receive material and identification of potential conflict material

If I were to look at where industry was a few short years ago on this issue compared to now, there’s no doubt that increased minerals sourcing tracing and accountability in conflict-free minerals is improved. The system as presently planned, in pilot stages or in process certainly has some flaws as most new initiatives have. But given the industry, region, national and international levels of cooperation that is rapidly becoming evident, I’ve no doubt that the positive outcomes will be great.

Aaron Hall, Policy Analyst at the Enough Project in a recent interview with Resource Investing News said “It’s a start. You have to take small steps forward. The fact that governments and industry are thinking about this shows concern and to a large extent they are willing to tackle the problem,” said Hall. “I think it’s remarkable that the multiple stakeholders involved in this process have been able to come together in such a short amount of time and make progress towards setting up a regional certification regime for these minerals.”

Part 1 of this series highlighted the issues, regulatory and supply chain complexities and efforts by industry to tighten the control of precious minerals sourcing. This is especially critical in developing nations, where human trafficking, regional conflict and lack of environmental laws and basic human rights are the rule rather than the exception. This post will look into a few examples of key manufacturers and efforts to date audit, validate and trace the precious minerals supply chain and what roles non-governmental organizations and we consumers have played so far in addressing this prickly issue.

“Armed conflict may take a variety of forms, such as a conflict of international or non-international character, which may involve two or more states, or may consist of wars of liberation, or insurgencies, civil wars, etc. High-risk areas may include areas of political instability or repression, institutional weakness, insecurity, collapse of civil infrastructure and widespread violence. Such areas are often characterised by widespread human rights abuses and violations of national or international law.”

Recent efforts by global industry associations and grassroots efforts by non-governmental organizations such as the Enough Project and its Raise Hope for Congo initiative have shed a good deal of light on a previously ignored issue. Unlike other countries, ore extraction in the Congo is both cheap and lucrative for the militias that control many of the artisanal mines. There has been widespread reporting about how child laborers are kidnapped from neighboring nations to work under forced conditions in the mines, (where miners often work for an average of $1 to $5 per day). An excellent article that describes the political and institutional issues that affect conflict affected areas, see the article Behind the Problem of Conflict Minerals in DR Congo: Governance by the International Crisis Group. This analysis places a lack of governance within the Congo squarely as a cause of the rampant growth of the conflict minerals trade and diversion of proceeds from sale to armed militias. Despite the “technical assistance” the author says the country receives from outside organizations, this “is not enough to compensate for the notorious lack of administrative capacity”.

Industry Under the Microscope

Courtesy David Lieberman/Flickr (Creative Commons license)

The intensity of recent news reports and discerning lack of detail in publicly reported data to date begs the question- have Intel and Apple really completely taken the “conflict” out their precious minerals sourcing, as recent headlines suggested? Or has their recent announcement been taken out of context and only another (positive) phase in their supply chain sourcing strategy. And if neither actually procures these materials from the Congo, are they merely shifting the issues to Asia?

Intel

To start answering these questions, I looked more deeply into the efforts to date by Intel to “get the DRC out” of the sustainable sourcing question. According to Suzanne Fallender of Intel on their corporate social responsibility blog, the company has made significant strides since 2009 to stay ahead of this issue. Specifically, according to Ms. Fallender (who I attempted to reach out to but had not yet returned my inquiries), Intel initiated a series of efforts in 2009 (prior to the CFS program), including:

Posted its Conflict-Free Statement about metals on its Supplier Site

Requested that its suppliers verify the sources of metals used in the products they sell us

Increased the level of internal management review and oversight, as well as transparency and disclosure on this topic in this report

Engaged with leading NGOs and other stakeholders to seek their input and recommendations.

Hosted an industry working session at its offices in Chandler, Arizona in September 2009 with more than 30 representatives from mining companies, traders, smelters, purchasers, and users of tantalum to address the issue of conflict minerals from the DRC.

Funded a study with EICC members on defining metals used in the supply chain, and continues working on a similar project to increase supply chain transparency for cobalt, tantalum, and tin.

Important to note is that Intel was the first company in the electronics supply chain to conduct on-site smelter reviews. Since the end of 2010, Intel has visited more than 30 smelters to assess if any of its suppliers were sourcing metal from conflict zones in the. According to Ted Jeffries, Director of Fab Services and Consumables at Intel (who I also attempted to reach for this article), he recently stated “I don’t know that we have a complete handle on the whole supply chain, but we at least have a better handle on the nuances”. Despite a letter campaign to its suppliers, Intel elected to visit each site and see for themselves to verify what was being self reported. “For the most part, for the Intel supply chain, the smelters that we’ve visited have been very truthful. There have been little caveats here and there, but for the most part, we can trace all of their sources to plants in Australia, South America and other parts of the world,” Jeffries said at the Strategic Metals for National Security and Clean Energy Conference in Washington D.C. in mid March.

“It really takes someone stepping up to the plate and taking a leadership role and taking a risk on a strategy. We can sit around and debate these things until the cows come home and nothing will change. At the end of the day, if we want to move forward on this debate, someone needs to make a strategic decision and start moving in that direction”. -Ted Jeffries (Intel)

Apple and Hewlett-Packard

As I’ve reported in Part 1 of this series, the multitude of supply chain layers and sourcing channels developed over the years may be a difficult weave to untangle (often 5-10 layers between the mine and the end product). Take Apple, who (according to its recently released 2011 Supplier Responsibility Progress report ) has 142 suppliers using tin; these suppliers source from 109 smelters around the world. As a key participant in the EICC/GeSi CFS initiative, smelter audits are in process. Additional efforts to contact Apple supply chain and sustainable sourcing staff have been unanswered. Unlike Apples sub-par sustainability efforts with its Chinese electronics supply chain, it’s heartening that the company is taking some leading action in this area.

Hewlett-Packard says, “[T]hese issues are far removed from HP, typically five or more tiers from our direct suppliers.” But they have gone a long way in developing an aggressive auditing, tracking and reporting mechanism. HP and Intel have published the names of their leading suppliers for the 3T metals, as well as some smelters. On April 8th, HP issued its revised Supply Chain Social and Environmental Responsibility Policy as part of list supplier compliance program (which HP began developing ten years ago). HP’s suppliers are expected to “ensure that parts and products supplied to HP are DRC conflict-free”. Moreover suppliers are to establish policies, due diligence frameworks, and management systems, consistent with the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas.

Confronting Our Electronics Addiction

“I’m a Mac and I’ve got a Dirty Little Secret”. That was the title of parody of the Apple ad campaign, issued last year by the Enough Project. While the video took a soft-handed approach to helping consumers make a visceral connection with conflict minerals, it also suggested that consumers’ purchasing power can influence corporate sourcing behaviors…and they can.

Last year, Newsweek magazine looked at this issue square in the eye. The article stated “It takes a lot to snap people out of apathy about Africa’s problems. But in the wake of Live Aid and Save Darfur, a new cause stands on the cusp of going mainstream. It’s the push to make major electronics companies (manufacturers of cell phones, laptops, portable music players, and cameras) disclose whether they use “conflict minerals… Congo raises especially disturbing issues for famous tech brand names that fancy themselves responsible corporate citizens. As Newsweek also reported, the Enough Project and its allies “believe awareness drives better policy. So as we lovingly thumb our latest high-tech device, perhaps some self-reflection: after all, the final point in the supply chain is us.”

As an effort to raise consumer awareness of efforts that companies are (or are not) taking, the Enough Project[1] surveyed the 21 largest electronics companies to characterize progress made toward establishing documented and verifiable conflict-free supply chains in Congo. The project ranked electronics companies in and four other product sectors on actions in five categories that have significant impact on the conflict minerals trade: tracing, auditing, certification, legislative support, and stakeholder engagement. Four levels of progress (ranging from Gold Star to Red) were established based on efforts to date and suggestions to shore up perceived weaknesses. The user-friendly ranking can be used by consumers to support purchasing decisions and offers a way to get in contact with each company to communicate calls to action.

Enough Projects analysis (as shown in the graphic) indicates that six electronics companies are leading industry efforts to address conflict minerals, while two-thirds of the appeared to be taking limited action. This graph also suggests that the bottom -third are way behind the industry curve.

Meanwhile, the auto, jewelry, industrial machinery, medical devices, and aerospace industries are well behind the electronics sector and only now beginning to address the role that conflict minerals may play their respective supply chains. I’ll be watching with interest what the Automotive Industry Action Group does. So the opportunity for direct end-consumer advocacy to influence corporate social responsibility in sourcing is bountiful.

Evidently, the biggest challenges to grabbing the conflict minerals issue by the reins is in untangling the convoluted supplier network, building a robust product traceability and independent verification process, and enacting sound policy that drives accountability and transparency among all stakeholders. Not an easy task, but compared to years past, a vast improvement for sure. The final part of this series will highlight specific international guidance and steps that industries and consumers can continue taking (while we wait for the SEC rules to get finalized) to proactively address supply chain minerals sourcing and maintain a high level of corporate social responsibility.

[1] The Enough Projects focus is on conducting field research, consumer and issues advocacy, and communications to support a grassroots consumer movement.

Last week, it was widely reported that both Intel Corporations and Apple Computers had pulled the plug on sourcing of precious minerals typically used in the manufacturing of its high-tech products from the Democratic Republic of the Congo (DRC). These basic building blocks of our cell phones, computers and other consumer electronics are widely known as “conflict minerals”, mainly because of the large spread connection the “artisanal” and industrial mines that produce the materials and the flow of money to supply arms to rebels fighting in the DRC. Conflict minerals are to the 21st Century high-tech world what “blood” diamonds were to the 19th and 20th centuries.

Apple, Intel and other U.S. based corporations have signed onto the Conflict-Free Smelter (CFS) program, which applies to shipments of tin ore, tungsten, gold and coltan from Congo and its neighbors. The CFS program demands mineral processors prove purchases don’t contribute to conflict in eastern Congo[1]. The regulations were developed by the Washington-based Electronic Industry Citizenship Coalition (EICC) and Global E-Sustainability Initiative (GeSI) in Brussels (Belgium), representing electronics companies including Intel and Apple, Dell etc. The program is being marshaled by the GeSI Extractives Work Group, and summarized on the EICC website.

Regulatory Framework

The CFS initiative was established in response to the conflict minerals provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010), signed into law last July (page 838 of the 848 page Act to be exact). Section 1502 requires companies to make an annual disclosure to the Securities and Exchange Commission regarding whether potential conflict minerals used in their products or in their manufactur­ing processes originated in the DRC or an adjoining country. If the minerals were sourced from these countries, companies must report on the due diligence measures used to track the sources of the minerals if they were derived from the DRC or neighboring nations. In addition, the Act will require a 3rd party audit to verify the accuracy of the company’s disclosure. Finally, a declaration of “DRC conflict-free” must be provided to support that goods containing minerals were not obtained in a manner that could “directly or indirectly … finance armed groups in the DRC or an adjoining country”.

The U.S. Securities and Exchange Commission was to have issued regulations to stem purchases of conflict minerals this week. However, on Monday the SEC delayed issuance of the specific rules to the August-December timeframe. Ultimately, U.S. companies will be required to audit mineral supplies next year to identify purchases that may be tainted by the Congo fighting, according to draft SEC regulations.

Two groups of companies will be directly impacted by the Conflict Minerals Law: companies that are directly regulated by the SEC, and companies that are not SEC-regulated, but are suppliers to impacted companies. Starting April 1, the CFS scheme began requiring due diligence and full traceability on all material from the Congo and other neighboring conflict zones. Then, these audits, or at least their summaries, are to be incorporated into SEC regulatory findings (in some manner, as yet to be defined by the SEC).

California Steps Up

Meanwhile, this past Tuesday, committee of the California State Senate passed a Senate Bill 861 Tuesday that will curb the use of conflict minerals from Congo. The 9-1 vote in the Governmental Organization Committee was a first step to making California the first “conflict-free state”. If it passes the full assembly, the bill would prohibit the state government from contracting with companies that fail to comply with federal regulations on conflict minerals.

According to D.C. attorney Sarah Altshuller (@saltshuller) “The California legislation, even if passed, is unlikely to impact many companies: it would apply only to companies against which the SEC has filed a civil or administrative enforcement action. That said, California’s legislative activity reflects significant stakeholder concern, as well as advocacy activity, regarding the ways in which the sourcing of specific minerals may be contributing to the ongoing conflict in the DRC.” Many engaged in the initial debate were concerned too that the state was too early to move forward in the absence of final SEC rules.

Supply Chain Ripples?

Courtesy of rasberrah (Creative Commons Licence)

Leon Kaye (@leonkaye), reporting last week in Triple Pundit, “The CFS identifies smelters through independent third-party auditors who can assess that raw materials did not originate from sources that profit off the conflict in the Democratic Republic of Congo. Now Intel and Apple have stopped purchasing minerals from this region, which has transformed a voluntary program to what the president of an exporter association in Congo called “an embargo.”

Also, as reported also last week by Bloomberg, “There is a de-facto embargo, it’s very clear,” said John Kanyoni, president of the mineral exporters association of North Kivu, in the Democratic Republic of Congo. “We’re committed to continue with all these programs. But at the same time we’re traveling soon to Asia to find alternatives.”

Defacto or preemptive, this move is long overdue and is bound to bring to light an elephant in the room that manufacturers and consumers alike have been quick to run from and avoid. I’ve reported in recent posts my dismay over the approach that Apple has taken in addressing its supply chain sustainability issues, especially in Asia. The fact that Apple has electively chosen, along with Intel to be a first mover to shake the supply chain up and seek to right some corporate social responsibility wrongs is encouraging. However as my colleague Mr. Kaye correctly notes, neither may have had a choice.

As noted in an article by Future 500’s Juliette Terzieff this week, “buyers for Chinese, Indian and other countries’ manufacturers who are not part of the CFS program or subject to U.S. legislative requirements coming in effect in early 2012 face no regulatory requirements to ensuring their purchases are conflict-free. This could prove particularly valuable for those seeking to sidestep controls given that Chinese demand for minerals like copper are predicted to rise 7% every year between 2010 and 2014.”

How Many Companies are affected?

In an excellent analysis by ELM Consulting and reported in a series on AgMetal Miner last fall, the amount of companies falling into the two previously mentioned categories is unclear. According to the analysis:

For the first category, the SEC estimated that 1,199 companies will require a full Conflict Minerals Report. The methodology for determining this number is worthy of mention. The SEC began by finding the amount of tantalum produced by the DRC in comparison to global production (15% – 20%). The Commission selected the higher figure of 20% and multiplied that by the total number of affected issuers, which they stated is 6,000. (75 Fed. Reg. 80966.) Clearly, this methodology does not consider many additional factors and the actual number of companies that will require the full audit is certain to be higher. For the second category – the suppliers – no estimate has been made. But if one anticipates 10 suppliers (we have data indicating that the number of suppliers ranges from one to well over 100 for a single directly-regulated company; an average of 10 suppliers may be conservative, especially given the wide range of conflict mineral-containing products) for each company directly regulated, the number of additional companies impacted would be 12,000.

The proposed SEC rules do attempt to take on suppliers who have “influence” over contract manufacturers who provide name brand products for larger companies. The proposed rules also apply to retailers of private-brand products and generic brands. Finally there is some ambiguity around how scrap electronic waste is to be treated. The SEC has not defined what is recycled or scrap material and manufacturers have a fair degree of latitude in their disclosure reports as to how they will treat scrap/recycled material.

The BBC reports that Rick Goss, of the Information Technology Industry Council (ITIC), whose members include Apple, Dell, Hewlett Packard, Nokia, states that “it will be impossible to make sure that not one single illicit shipment entered the supply chain….It is too complicated in terms of corruption – illegal taxation – to absolutely guarantee that an illegal shipment did not enter the supply chain, regardless of all private and public sector efforts,’ he warns. The minerals could go elsewhere. Asian smelters are sourcing from any number of countries.”

Summary

If it is impossible to track the source of all the minerals going into the stream, then the big question is what countries and companies will do to fix inadequate governance and systems. And if U.S. companies shift their sourcing to other nations, will this be enough? Is global manufacturing merely playing “kick the can”?

The conflict minerals issue just may be the “perfect storm” that combines elements of resource consumption, consumerism, corporate social responsibility, supply chain management, politics and product stewardship.

The next post in the series will dive a bit deeper into efforts by key manufacturers in how they are auditing, validating and tracing the conflict minerals supply chain and what responsibilities we as consumers have in lessening the impacts of this perfect storm.

[1] As part of the Conflict-Free Smelter program, participating tech companies must provide third-party verification that their processors don’t contain commonly used minerals that fund armed conflicts in Central Africa, specifically the Democratic Republic of Congo. Minerals from Central Africa commonly sourced for tech components include gold, titanium, tungsten and tin; the DRC provides 5 percent of the world’s tin supply, as well as 14 percent of tantalum.

Note: this is the second of a three-part series exploring “materiality” and the intersection of supply chain management, sustainability and corporate social responsibility.

My first post in this series suggested that there was an intersection or cross-walk between sustainability, corporate environmental responsibility and supply chain management. This “sweet spot” can be found in conducting “materiality” analyses. Although the concept of materiality in the finance sector has a long track record in accounting circles, its application in the sustainability space is much newer. Whereas financial reporting has taken a more short-term view and approach to handling performance and risk, sustainability generally factors in a much longer, strategic planning and implementation horizon.

Businesses have learned that in a world that has grown more transparent, they need to clearly identify what is material to their operations and stakeholders, and communicate this in trustworthy and convincing ways in order to drive creativity and innovation. Materiality determination is a lot like the aspects and impacts analysis that is common to ISO 14001 based Environmental Management Systems. ISO 14001 seeks to identify those elements of their activities, processes, services and products that have the greatest impact on the environment. Materiality analysis does not only that but dives deeper into operations and stakeholder issues. Let’s take a moment to explore materiality’s origins in the sustainability space.

Roots of Materiality in Sustainability Reporting

In 2003, The UK- based think tank, AccountAbility developed the AA1100 Standard. AA1000AS (2008) assurance provides a “comprehensive way of holding an organization to account for its management, performance and reporting on sustainability issues by evaluating the adherence of an organization to the AccountAbility Principles and the reliability of associated performance information. It also provides a platform to align the non-financial aspects of sustainability with financial reporting and assurance through its understanding of materiality”. The framework for a materiality assessment is depicted in the adjoining graphic, jointly developed by AccountAbility, BT Group Plc and LRQA (The Materiality Report- Aligning Strategy, Performance and Reporting- November 2006).

The AA1100 Standard was revised in 2008. In it, the AA1000 Materiality Principle requires that the “Assurance Provider states whether the Reporting Organization has included in the Report the information about its Sustainability Performance required by its Stakeholders for them to be able to make informed judgments, decisions and actions.” Materiality norms taken into account by this standard are:

(c) Peer-based norms (considering how company’s peers and competitors address the same issues, irrespective of whether the company itself has a related policy or whether financial consequences can be demonstrated; and

The Global Reporting Initiative has developed a framework for materiality determination as part of the G3 Sustainability Reporting Guidelines The GRI considers materiality as “ the threshold at which an issue or indicator becomes sufficiently important that it should be reported.” The GRI defined a series of internal and external criteria to be considered when performing a materiality analysis. Later in 2009, the GRI convened a to evaluate and create more specific guidance for determining materiality. The draft content recognized that materiality analysis was one of the “least systematized aspects of reporting”:

“Identification of material issues and boundaries are core challenges for any standard risk assessment process. Despite the importance of these challenges to good reporting processes, they represent the most difficult and underdeveloped areas for most companies.” – Draft Report Content and Materiality Protocol, page 2.

The draftReport Content and Materiality Protocol review period closed last fall and is in review at this time.

Materiality “First Movers”

A number of companies have taken a “first mover” position in documenting materiality in their corporate sustainability reports. Most have used a format similar in scope and criteria as the GRI or AA1100 frameworks, with some modifications. Companies that have reported on materiality and that reach out to stakeholders what they find to be material to their interest and have some “reasonable control” over include companies from diverse manufacturing sectors such as automotive (Ford[1], BMW, Volvo), communications (BT), energy development (Exxon, Mobil) pharmaceuticals (Novo Nordisk, Pfizer, Johnson & Johnson), electronics and control Systems (Cisco, GE, Omron), consumer products (Gap, Starbucks) and mining (Holcim, Rio Tinto), among many others. One such company is Danisco A/S.

I recently had the opportunity to visit with Mr. Jeffrey Hogue (@jeffreyhogue) of Danisco. Mr. Hogue is Sustainability and Corporate Social Responsibility (CSR) Global Leader at Danisco A/S. Danisco is a worldwide manufacturer of food and beverage products, including cultures, emulsifiers, gums & systems and natural sweeteners. The company does business with the world’s largest food manufacturers. Daniscos’ 2009/2010 Sustainability Report is extremely comprehensive and has been awarded some of the highest honors for corporate social responsibility reporting in the past year. The company looked deeply into materiality issues in its report and has developed strong operational programs to manage its supply chain in a proactive manner. It’s web site indicates that they have developed and implemented a “new supplier management system…to strengthen our global supplier and material assessment programme through better audit portfolio management tools, detailed assessments, prioritised audits and improved collection of supplier and raw material data.”

Danisco catalogued and assessed stakeholder input from a variety of internal and external surveys and other sources, then indexed them according to their impact on its business. Issues emerging from the data were ranked according to their impact on the business and the degree of importance to stakeholders, forming the basis for the Materiality Matrix (see Figure 1 below). The company strategically decided to address sustainability risks and opportunities identified as having “medium-to-high impact” on its business and being of “medium-to-high” interest to our stakeholders.

I asked Jeff if he could shed some insight on the company determined materiality and its resulting high ranking for supply chain (criteria, indicators etc). I also asked Jeff if he’d share his thoughts on the critical nature of supply chain management relative to triple bottom line based materiality (as well as risk management).

“I think that there are three dimensions of this subject and why our supply chain is very important to our success.

Risk reduction – With a supplier base of over 3000 key suppliers it is crucial for us to manage any risk that may be present in our upstream value chain to eliminate the impact on our operations and our customers. Therefore it is a baseline requirement that we scrutinize our supply chain and develop robust and systematic programmes to address and mitigate risk. Most of our customers expect it — and although it is in a lot of ways a compliance programme, we do derive value in knowing that we will maintain consistent raw material quality, avoid issues related to labor and human rights, and supply security. We also have the ability to anticipate and mitigate other sustainability related endpoints like the impacts on agricultural raw materials from climate change, water scarcity, regulation, etc.

Opportunity harvesting – We also see the need to understand the potential synergies between our organization and our suppliers. In many cases we do this to provide shared value in terms of capacity and livelihood building for our suppliers alongside our need for more secure raw material sources. We often do this on a case by case basis — mainly on a regional level where it makes sense

Value chain pressures and expectations – We are experiencing a world where retailers and our largest customers see these issues in the light of their entire value chain and are actively seeking ways to reduce their indirect impacts. This of course is cascaded down their supply chains through our organization to our suppliers. We also see a tremendous opportunity in this area to be first movers and to act now based on how the retailers are moving. This will put us in a position where we can be proactive and are faster to respond to value chain pressures.”

Materiality in CSR Reports of the Future

I also had the pleasure of several e-mail exchanges with Ms. Elaine Cohen (@elainecohen). Elaine is a well known CSR consultant, Sustainability Reporter, HR Professional (and self-avowed ice cream addict). She’s the Founding partner at BeyondBusiness Ltd (www.b-yond.biz/en) and consults to companies on CSR strategy, processes and sustainability communications. I asked Elaine what trends she has seen in CSR reporting these past few years where supply chain has been classified as having “high materiality” to a company’s operations and to their stakeholders.

“I believe supply chains have been becoming increasingly more important over the past few years, as the effects of inadequate supply chain accountability are more and more visible in our market place. We can split these issues broadly into two: the human rights issues in supply chains and the sourcing issues in supply chains. The HR issues surfaced mainly with the apparel issues in the late 90’s. But the last five years have been characterized by significantly greater transparency due to the spread of the internet and ease of access to information.”

“… Additionally, I believe the increasing focus on Human Rights and the work of John Ruggie [Special Representative of the United Nations Secretary-General on Business & Human Rights], have been clear about squarely placing the responsibility for clean supply chains on the manufacturer. There is almost nothing more material for apparel suppliers than human rights in their supply chains – just take a look at some of their Sustainability reports. Regarding sourcing, this has also become a major issue – Starbucks and Ethiopian coffee farmers, Unilever and others in palm oil issues, Nestle and the Greenpeace KitKat campaign . Manufacturers are getting clearer that sourcing decisions are now much more visible than in the past, and much more risky. So for these companies, raw materials sourcing is most definitely high materiality. Sustainability reports are reflecting these trends and the space allocated to human rights, responsible sourcing and factory auditing is significantly greater that it was some years ago.”

Trending forward in 2011, I asked Elaine to read the tea leaves on supply chain management, CSR and materiality.

“I believe these issues will continue to maintain high-profile and ultimately move towards cross sector alliances to resolve issues that affect all players in a sector such as the Round Table on Sustainable Palm Oil , work done by the apparel sector and the electronics industry to determine common standards. We might see multi-company collaboration on third-party factory inspection and evaluation. We might see a set of industry wide agreements on core issues….countries such as China and India are also aware of risks, and greater legislation and enforcement in these countries may help resolve some issues.

Takeaways on Materiality in the Supply Chain.

Jeff related to me that a key NGO with a critical stake in Daniscos’ supply chain affairs remarked that supply chain management and sustainability go hand in hand and is basically a foundational aspect of business operations and risk management. The challenge, according to Jeff, is in finding the “shared value proposition” that is often difficult to achieve, especially across multiple layers of an often globally distributed supply chain. Finding localized suppliers and establishing multi-stakeholder collaborations hold promise as models where stakeholder interests and large-scale products manufacturers can find the needed common ground to advance supply chain sustainability.

Elaine summed up our dialogue with the following suggestions: “For manufacturers, don’t underestimate the importance of high-quality supply chain management – get it right before it gets you right, learn from the mistakes of others, think of supply chain management as a core business issue which goes to the heart of strategy and brand decisions, not just something that is tacked on to a new project as a deliverable…In terms of materiality, make sure you “engage, engage, engage” at [the] local level with a wide range of stakeholders, so that you are not demanding deliverables which are not reasonably feasible. Report transparently on all aspects of supply chain because, if nothing else, this will assist in identifying hidden costs and areas of potential risk.”

Thanks Elaine! I couldn’t have said it better myself.

In Part 3 of this series, I’ll lay out the business case for materiality assessments to strengthen supply chain management and a straightforward framework for materiality analysis.

[1]Ford’s 2008/09 Sustainability Report includes an interactive materiality matrix that categorizes issues based on two dimensions: the degree of stakeholder concern and the extent of the current or potential impact on the company.

Note: this is the first of a three-part series exploring “materiality” and the intersection of supply chain management, sustainability and corporate social responsibility.

As the ongoing Wikileaks controversy has made very clear, the political and business world is on information overload. Some of the information that is disclosed can reveal damaging and often jaw dropping news- and somewhere, interested stakeholders either celebrate or shudder. If a company is questioned about its work practices, environmental impacts of its products or services, it’s too late to claim “it’s not my problem”. By the time the conversation happens, it’s already a “material” issue. We are (as former Beatle George Harrison penned) indeed “living in the material world”.

“Materiality” is a term that is frequently used in corporate financial circles, especially as it relates to corporate responsibility, risk and liability management. A “material issue” is commonly understood in the financial industry as a factor that can have a significant financial impact on a company. These issues are generally disclosed to shareholders, quantified to a degree in annual financial reports, and addressed within the strategic planning process.

Tomorrow’s effective corporate social, environmental and economic reporting must communicate information that is ‘material’ to stakeholders in making coherent decisions and taking planned and timely actions relevant to their interests. An appropriate redefinition of materiality is therefore essential for business managers, for policy makers establishing tomorrow’s regulatory frameworks, and for those involved in their implementation and oversight.- excerpt from Redefining Materiality -Practice and public policy for effective corporate reporting (AccountAbility, 2003)

As sustainability meets supply chain networks, the issue of ‘materiality’ is taking on a new meaning. Maintaining a “responsible supply chain” involves ensuring that human and labor rights are acknowledged along the supply chain. Leading companies are engaging their stakeholders to assure that proactive institutional controls are in place to manage the environmental footprint of the value chain. In addition, companies are increasingly promoting ethical business practices and fostering community based initiatives that support companies “social license to operate”. As one example, on average, 40% to 60% of a typical consumer product manufacturing company’s carbon footprint is from its supply chain[1]. For retailers, the figure is closer to 80%, with an equally high supply chain exposure to human rights and social issues. By managing supplier and community engagement in a way that achieves and maintains the highest social and environmental standards, a company can achieve performance goals while creating a ripple effect that raises standards deep within the supply chain.

A recent report by Ernst and Young stresses a number of factors that are contributing to more companies expanding their supply chain initiatives in support of sustainability. Key factors cited in the report are:

It’s the last two points that touch most closely on the concepts and issues of ‘materiality’.

“Materiality” 101

As I noted above, ‘materiality’ analysis requires identifying the issues that are of high concern to your stakeholders and also of high strategic relevance to your company. These are the issues that should be at the core of your corporate responsibility approach and communications strategy, both internally and externally. The concept of “materiality” for sustainable strategic planning widens the analytical spread to address significant environmental or social impacts—as understood by the company AND its stakeholders.

“Topics and indicators that reflect the organization’s significant economic, environmental, and social impacts, or that would substantively influence the assessments and decisions of stakeholders.” -Global Reporting Initiative G3 Sustainability Reporting Guidelines, October 2006.

Stakeholders can generally be defined as: investors, employees, customers, communities, non-governmental organizations (NGO), regulators, and (of course), suppliers. Suppliers upstream of core manufacturing operations hold a critical place in operationalizing organizational sustainability initiatives. They can serve a key external role in determining if an environmental, social or financial issue that can be encountered within the product value chain is great and unmanageable or small and can be contained. If manufacturers can control or influence supplier behavior, the environmental footprint of the product before it enters the production cycle, its likely that the entire product life-cycle footprint can be narrowed downstream at the point of use and end of life. Also, in softening the environmental and social “load” the residual effect would likely be greater stakeholder confidence, enhanced financial assurance and managed reputation.

The Case About “Conflict Minerals” and Supply Chain Management

Photo by Mark Craemer

Making the rounds in sustainability and supply chain circles so far this year is closer examination of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010), signed into law last July. Within the body of this voluminous Act (page 838 of the 848 page Act to be exact) is a six-page section that may have a marked impact on the supply chain for companies across many industries. This law and the issue of conflict minerals (and other commodity driven issues like palm oil extraction, cocoa or coffee production) is a golden example of where supply chain management meets social responsibility and ethics. This issue sits squarely in the world of materiality, both to internal operations and to external stakeholders.

Section 1502 of the Dodd-Frank Act promulgates new requirements that will have companies reporting to the Securities and Exchange Commission (SEC) on the origins of many precious metals and minerals in their products, including gold, tin, tantalum and tungsten. The focal point of this legislation is targeted on so-called “conflict minerals”. Most of these minerals are sourced in the Democratic Republic of the Congo (DRC). Many of the proceeds from the sale of the minerals entering the supply chain are believed to be funding armed militia groups. The new provisions will create potential penalties for failing to comply with the SEC reporting requirements. Also, the provisions require that companies respond adequately to customer or third-party requests for information about how these minerals are included in a company’s products or manufacturing processes.

According to a recent white paper on the Dodd-Frank Act by Supply Chain Executive and IHS, Section 1502 requires companies to make an annual disclosure to the Securities and Exchange Commission regarding whether potential conflict minerals used in their products or in their manufactur­ing processes originated in the DRC or an adjoining country. If the minerals were sourced from these countries. Companies must report on the due diligence measures used to track the sources of the minerals if they were derived from the DRC or neighboring nations. In addition, the Act will require a 3rd party audit to verify the accuracy of the company’s disclosure. Finally, a declaration of “DRC conflict-free” must be provided to support that goods containing minerals were not obtained in a manner that could “directly or indirectly … finance armed groups in the DRC or an adjoining country”.

This Act and others like it are likely to create difficult, but attainable challenges for electronics manufacturers. The steepness of the challenge depends on the depth of the supply leading from initial extraction of materials to production and the frequency that the minerals exchange hands through the chain-of-custody. Most surveys taken from manufacturers suggest a lack of confidence in being able to confidently trace conflict minerals to the source (excluding the likelihood that illegal extracted minerals are also blending into the marketplace). So you could see the difficulty in companies demonstrating due diligence in tracing the chain of materials flows from point of origin.

Meanwhile, major manufacturers in sectors affected by the law already (electronics, cell phones etc) are starting to push new reporting requirements down their supply chains. Also, a number of industry associations are working with their members to develop codes of conduct associated with conflict minerals. They are also developing tracking tools and mechanisms to more accurately account for conflict mineral movement in compliance with Dodd-Frank. And still other NGO’s continue to fight conflict minerals on the ground and through public action.

The second post in this series will look at the successes and challenges surrounding materiality in the supply chain and the intersection with corporate social responsibility. I’ll present some industry leading examples of materiality analyses in corporate social responsibility reporting, and the criteria that went into determing levels of supply chain materiality . The third part of this series will dive into how to conduct a detailed materiality analysis and best methods for engaging the supply network to create positive, verifiable benefits and leverage risk.

[1] Medical products manufacturer Baxter estimates that 38% of the company’s overall carbon footprint is represented by its suppliers. As part of its green supply chain initiative, Baxter “concentrates its efforts to green its supply chain on minimizing transportation-related emissions, procuring raw materials and other goods and services with reduced environmental impacts, and helping suppliers improve their environmental performance.”